Infra investors could lose ‘more than 50% of portfolio value to physical climate risk before 2050’

Written by Adam Cadle

14/08/2023

Infrastructure investors, including insurers, could lose more than 50% of the value of their portfolio to physical climate risk before 2050 in the event of runaway climate change, EDHEC Infra & Private Assets has warned in its latest paper.

Moreover, it said the average investor will also lose twice as much to extreme weather, mostly in OECD countries, compared to a low carbon scenario.

Over the past two decades, institutional investors have increasingly allocated capital to private, mostly unlisted, infrastructure companies like toll roads, airports, power plants and pipelines. The firm’s indexing and valuation platform for investors in private infrastructure, infraMetrics, tracks a universe representing around $4.1trn of enterprise value and US$2.2trn of market capitalisation at current market prices in 25 key markets. The cost of physical risks within the ‘Current Policies’ scenario represents, on average, 4.4% of the total NAV of the assets in the database by 2050. The average maximum loss is -27%, and the effect of extreme climate events is negative across all sectors, impacting the NAV of transport (-10% on average with a maximum of -97%) and the energy an water resources sector (-7% on average, with a maximum of -40%).

The paper said most investors in infrastructure hold a few individual assets and therefore have potentially high concentration in physical risks.

“Investors who hold direct stakes in infrastructure assets, be they fund managers or asset owners, usually have fewer than 20 investors,” it stated. “The average asset owner typically has fewer than 10 direct stakes. As such, when an investor finds themselves exposed to the riskiest assets in the same portfolio, losses can mount to 27% in the orderly transition scenario and to 54% in the 'Hot House' scenario.”

Related Articles